DEVELOPMENT OF BANKING

IN INDIA
FROM
POST INDEPENDENCE
PERIOD
TILL THE PRESENT TIME

SUBMITTED TO: SUBMITTED BY:

Prof. ANURADHA SEN PRATIK MOR

(IE & M)

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DEFINITION OF BANK

The Oxford dictionary defines the Bank as

An establishment for the custody of money, which it pays out, on a customer Order.

According to Whitehead

A Bank is defined as an institution which collects surplus funds from the public, safeguards them, and
makes them available to the true owner when required and also lends sums be their true owners to
those who are in need of funds and can provide security.

Banking Company in India has been defined in the Banking Companies act 1949,

One which transacts the business of banking which means the accepting, for the purpose of lending or
investment of the deposits of money from the public, repayable on demand, or otherwise and withdraw
able be cheque, draft, order or otherwise.

The banking system is an integral subsystem of the financial system. It represents an important channel
of collecting small savings from the households and lending it to the corporate sector. The Indian
banking system has Reserve Bank of India (RBI) as the apex body for all matters relating to the banking
system. It is the central Bank of India. It is also known as the Banker To All Other Banks.

History of banking sector in India

Origination of banking in India dates to the last decades of the 18th century with the General Bank of
India, which started in 1786, and the Bank of Hindustan (both of which are now defunct.) The oldest
bank in existence in India is the State Bank of India (SBI), the largest commercial bank in the country that
traces its origins back to June 1806. The history of the banking sector can be better understood by
dividing it into.

1. History of SBI and Associates

2. History of other banks in India (includes Nationalized Banks, Private Banks and Foreign Banks)

History of SBI and Associates

The oldest bank in existence in India is the SBI, which originated as the Bank of Calcutta in June 1806,
which almost immediately became the Bank of Bengal in 1809.Bank of Bengal was one of the three
presidency banks, the other two being the Bank of Bombay (established in 1840) and the Bank of
Madras (established in 1843), all three of which were established under charters from the British East
India Company. For many years, the Presidency banks acted as quasi-central banks, as did their
successors. The three banks merged in 1925 to form the Imperial Bank of India which started as private

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shareholders banks, mostly Europeans shareholders. State Bank of India Act was established in 1955.
Pursuant to the provisions of the State Bank of India Act (1955), the Reserve Bank of India (RBI), which is
India's central bank, acquired a controlling interest (60%) in the Imperial Bank of India. On April 30,

1955 the Imperial Bank of India was renamed as the State Bank of India. In 2008, the Government took
over the stake held by RBI. In 1959, the Government passed the State Bank of India (Subsidiary Banks)
Act, enabling the SBI to take over eight former State-associated banks as its subsidiaries.

History of other banks in India (includes Nationalized Banks, Private Banks

and Foreign Banks)

No Year Period Characterized by

1 1840 to 1947 Pre Independence
2 1947 to 1969 Post Independence to
Nationalization
3 1969 to1991 Nationalization to
Liberalization
4 1991 to 2010 Liberalization to
current
date
Small size, less regulated and bank
failures
Slower growth, private sector
dominance
and start of regulation
Nationalized of banks by
government, high
regulation, secular growth in
business and
expansion & rising inefficiencies
De-regulation, entry of private and
foreign banks and technological
advancement

Post Independence to Nationalization (1947 to 1969)

The Government of India (GOI) initiated measures to play an active role in the economic life
of the nation, and the Industrial Policy Resolution adopted by the government in 1948
envisaged a mixed economy. This resulted into greater involvement of the state in different
segments of the economy including banking and finance. The major steps taken to regulate
banking include:

In 1948, the RBI, India's central banking authority, was nationalized, and it became an
institution owned by the Government of India.

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In 1949, the Banking Regulation Act was enacted which empowered the RBI "to regulate,
control, and inspect the banks in India." The Banking Regulation Act also provided that no
new bank or branch of an existing bank could be opened without a license from the RBI,
and no two banks could have common directors.

Nationalization to liberalization (1969 to 1991)

By the 1960s, the Indian banking industry had become an important tool to facilitate the
development of the Indian economy. At the same time, it had emerged as a large employer,
and a debate had been ensued about the possibility to nationalize the banking industry. On
July 19, 1969, major process of nationalization was carried out. It was the effort of the then
Prime Minister of India, Mrs. Indira Gandhi by whom 14 major commercial banks in the
country were nationalized. The second phase of nationalization of the Indian Banking
Sector was carried out in 1980 with seven more banks being nationalized. With the second
dose of nationalization, the GOI controlled around 91% of the banking business of India.
Later on, in the year 1993, the government merged New Bank of India with Punjab National
Bank. It was the only merger between nationalized banks and resulted in the reduction of
the number of nationalized banks from 20 to 19. A number of questions were raised
regarding the procedure adopted by the then government in suddenly going for the
nationalization of banks. There was no official report, which had gathered expert opinions
and evidence on the need either for social control or for nationalization of banks. The chiefs
of private banks had not been consulted as to the need and implications of the proposed
measure.

Liberalization to current date (1991 to 2010)

The policies of nationalization and social reforms that were supposed to promote a more
equal distribution of funds, also led to inefficiencies in the Indian banking system. To
alleviate the negative effects, some reforms were enacted in the second half of the 1980s.
The main policy changes were the introduction of Treasury Bills, the creation of money
markets, and a partial deregulation of interest rates. Despite the reform attempts, the
Indian banking sector had like the overall economy severe structural problems by the end
of the 1980s. By international standards, the Indian banks were extremely unprofitable
despite a rapid growth in deposits. In 1991, GOI liberalized the economy. The objective of
banking sector reforms was in line with the overall goals of the 1991 economic reforms of
opening the economy. Narsimhan Rao government embarked on a policy of liberalization
by licensing a small number of private banks. These new banks came to be known as New
Generation tech-savvy banks, and included Global Trust Bank (the first of such new

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generation banks to be set up), which later amalgamated with Oriental Bank of Commerce,
UTI Bank (now re-named as Axis Bank), ICICI Bank and HDFC Bank. This move, along with
the rapid growth in the economy of India, revitalized the banking sector in India, which has
seen rapid growth with strong contribution from all the three sectors of banks, namely,
government banks, private banks and foreign banks.

Privatization

1. In the year 1994, Private sector banks were permitted to commence operations in India.
Banks were allowed to raise the capital to meet the capital adequacy norms through capital
market route, provided the government holding does not fall below 51%.

2. FDI/FII limits on investments in shares of private sector banks were raised to 51% in
2001.

3. In 2004, FDI/FII limits on investments in shares of private sector banks was further
relaxed and increased to 74%, with no one FII holding more than 5% stake without the
consent of RBI and FII limit in PSBs was capped at 20%. 4. Foreign banks with restriction
on branch opening and operation were allowed to enter on selective basis in 2004. More
liberal entry for foreign banks was proposed after April 2009.

Entry of foreign banks

RBI announced its policy decision on March 2004 for gradual entry of foreign banks in
India in synchronized manner in two phases. In order to allow the Indian Banks sufficient
time to prepare for global competition, initially the entry of foreign banks in first phase was
more restrictive.

Phase 1 (March 2005 to March 2009)

1. Foreign banks were allowed to establish presence in India and were given an option to
operate through branch presence or set up a 100% Wholly Owned Subsidiary (WOS).

2. Foreign banks were allowed to open 12 branches a year (the limit was in line with World
Trade Organization (WTO) commitment). Branch licensing procedure was kept same as
applicable for private banks. More liberal branch opening policy was adopted in under-
banked areas.

3. The limit of 12 branches a year was raised to 20 branches for foreign banks in March
2006.

4. Acquisition of shares in Indian banks by foreign banks was permitted for banks which
are identified by RBI for restructuring.

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Phase 2 (April 2009 onwards)

1. Branch expansion: - After reviewing the experience of the first phase, RBI has proposed
to remove the restriction on branch expansion and limited excess to Indian market and
treating them on par with domestic banks to the extent appropriate.

2. Listing of foreign banks: - After completion of the proposed year of operation in India,
WOS of foreign banks will be allowed to list and dilute the stake in the manner that at least
of 26% of the paid-up capital remains with the resident Indian.

3. Mergers and acquisitions: - After a review is made with regard to the extent of
penetration of foreign investment in Indian banks and functioning of foreign banks, foreign
banks may be permitted, subject to regulatory approvals and such conditions as may be
prescribed, to enter into merger and acquisition transactions with any private sector bank
in India, subject to the overall investment limit of 74 per cent.

Classification of banks into various groups

Banks in India

Scheduled Commercial Unscheduled Commercial

Banks
Banks

Public Sector Private Sector Foreign Banks Regional

Banks Banks Rural Banks

State bank of India and Nationalized Bank

associates
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